āDeveloping economies are committed to developing infrastructure.ā ABBās Michel DemarĆ© offered a CFOās perspective on the silver linings in todayās economic clouds.
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In emerging and transition economies, risks of loan default, the inherent potential for social unrest and a steep decrease in demand from historical peaks all pose very tangible challenges, explained DemarĆ©. However, these countries are still relatively rich in opportunities. āThese governments are committed to developing infrastructure,ā said DemarĆ©, citing examples such as the power industries in India and China, as well as non-oil industries in the Middle East. China, for example, has $586 billion tagged for infrastructure investment. These same areas also have funds available for state-backed enterprises, and the plans can be implemented more quickly than in developed economies. China also has set the goal of improving its energy efficiency by 20% from 2006 to 2010.
Slow decision-making and implementation hurdles are among the many challenges in mature markets. Add the scarcity of private funding and growing protectionism to the list, and itās no wonder growth in developed economies has been so anemic. But DemarĆ© cited numerous opportunities here as well. āBehind every risk is an opportunity,ā he explained. āIt is important to focus on the long term.ā A sense of urgency will speed up innovative marketing opportunities such as renewable energy in mature economies, said DemarĆ©. Plus, those governments are committed to fix their economic problems and support growth, especially since considerable investment is needed just to maintain the current levels of service for things like power grids and rail networks.
In France, for example, ā¬26 billion has been designated for infrastructure. Germany has earmarked ā¬60 billion, and Italy ā¬25 billion for projects that include infrastructure spending. Many of the benefits of energy efficiency still are being overlooked, explained DemarĆ©.
āIf you compare the U.S. with Japan, the GDP output produced per unit energy used in the U.S. is half of what it is in Japan,ā said DemarĆ©. The EU aims to improve energy efficiency by 20% in 2020, and Germany specifically aims to double its share of alternative energy power sources by 2020.
Opportunities also will arise from government stimulus programs, customers desiring help with improving productivity, a heightened political focus on energy efficiency and environmental concerns and growth potential through industry consolidation, said DemarĆ©. āThere will be failures, so if youāre fit and lean, then you might be able to benefit from that,ā he explained.
āA year ago, there was a lot of optimism the economic cycle would continue,ā said DemarĆ©. āIf we look back to 1970, we have never been as deep as we are now. We are witnessing negative GDP.ā
DemarĆ© doesnāt see any indication yet that the economy will rebound significantly in 2010. āWe see the overall condition of the banking industry,ā he explained. āAll of the U.S. banks put together have about $25 trillion of assets, and only about $5 trillion of those are true industrial. Another uncertainty is the growing role of government. The whole world is seeing business becoming more nationalized through governmental acquisitions. Thereās a lot of taxpayer money out there.ā
Who will survive the worst downtown in 70 years? āOnly companies that are fast and flexible in adapting to a rapidly changing competitive environment,ā explained DemarĆ©. āThe survivors will be companies that can adjust costs and capacity while keeping an eye on growth opportunities, companies that can combine global strength with local presence and partners. They will have built strong long-term relationships with customers and suppliers and have solid balance sheets to support the business through turbulent times.ā
But the forthcoming year is not without its risks. Governments defaulting on loans might cause some stress, explained DemarĆ©. āFurther bank failures, a weakening lending environment and increasing protectionism could be problems,ā he said. And the potential for short-term global deflation followed by hyperinflation will increase the need to be flexible.